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Fun fact: the Cantillon effect, whereby the first recipients of newly created money (banks and financial institutions) gain at the expense of the later recipien
by logicchains 4y ago
Fun fact: the Cantillon effect, whereby the first recipients of newly created money (banks and financial institutions) gain at the expense of the later recipients due to being able to spend it first before it causes much inflation, can by itself produce a highly unequal distribution of wealth. So even if everything else in society was perfect, the current central banking system would still lead to an uneven distribution of wealth.
This would be remedied if newly created money was credited directly to people's accounts rather than given to banks to lend out.
- valenterry 4y agoRight. Or, banks should bid for receiving newly created money (i.e. bidding for giving out new credits).
- jandrewrogers 4y agoThe Cantillon effect is a desirable result in theory because it can greatly increases the viscosity of the resultant inflation. This gives the economy time to adapt to the change in prices. Depositing newly created money directly into people’s accounts has the same base problem as the current situation — it is misallocated with respect to the need for expanding currency supply — but has the added problem that inflating the currency this way has very low viscosity, which is undesirable. Very liquid inflation is correlated with poor outcomes historically. Any practical allocation of new currency is going to be a misallocation, including a helicopter drop. The challenge governments have is inflating currency in a way such that it takes as long as possible to be fully reflected in the economy so that it is minimally disruptive. This turns out to be very tricky, precisely because it is virtually guaranteed to be a misallocation.
- logicchains 4y ago>The Cantillon effect is a desirable result in theory because it can greatly increases the viscosity of the resultant inflation Whether it's desirable in theory depends on what the end goal is. If the end goal is less wealth inequality, a less efficient but more fair system might be more desirable than a more efficient one that systematically transfers wealth from currency holders to financial institutions.
- imtringued 4y agoInequality is actually highly inefficient because inequality allocates production away from the poor who have human basic needs and toward the rich who basically only have superfluous consumption left. You can't argue that these rich people invest in better things than feeding children or educating them.
- Dracophoenix 4y agoWouldn't investment in automation solve that?
- mattclarkdotnet 4y agoBut it’s banks that create money, by crediting it to peoples’ accounts. When you get a loan from the bank they create the money by crediting your account.
- fithisux 4y agoWork creates money. Not banks.
- automatic6131 4y agoWork creates value, banks create money to represent the value. Money isn't value, it's a (n occasionally wrong) map of it.
- bennysonething 4y agoAnd some work creates negative value! :)
- Biologist123 4y agoIf environmental costs are included, it might be more than “some”, such is the structure of the economy.
- dsfyu404ed 4y agoEven without externalities there is plenty of work that isa net negative in the macroeconomic sense. If I pay someone to espouse the glories of ignorance, sow division and shill terrible policy online (not that many among us don't do it for free regardless) that work is of negative value to the broader economy despite having scant if any externality. But, that work is of positive value in the microeconomic sense hence why someone would get paid to do it. There are lots of niches like this in the economy. See related: Broken windows fallacy and bullshit jobs.
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- nly 4y agoWhat you suggest isn't possible though because it's the act of banks lending that creates the money to begin with.
- automatic6131 4y ago>whereby the first recipients of newly created money (banks and financial institutions) This is commonly misunderstood. Central banks create interbank money that cannot be spent outside the financial system. The banks themselves create the new money by issuing loans. However, they issue these loans to the already rich, thereby exacerbating existing inequality. There's a crucial distinction here to make, you are naming the correct effect, and it has the correct effect, but it happens somewhere different, so your proposed solutions would be adverse.
- bennysonething 4y agoI'd really like to understand this process. Is there a real world example of government employee adjusts a particular figure on a particular bit of software. That then somehow sends money to a particular bank?
- petrocrat 4y ago1. Interest on reserves increases the rate of growth of commercial bank reserve balances held at the Fed: https://fred.stlouisfed.org/series/IORB https://fred.stlouisfed.org/series/IORB 2. How Do Primary Dealers Make Money? Primary dealers buy bonds directly from the government and then resell them to clients and investors at a slight mark-up. This small difference in price is how primary dealers earn a profit. https://www.investopedia.com/terms/p/primarydealer.asp https://www.investopedia.com/terms/p/primarydealer.asp
- bennysonething 4y agoThanks
- metaphor 4y agoRecommend picking up a copy of Central Banking 101[1] for a gentle introduction; the basic mechanics of fractional reserve banking are explained in Chapter 2. [1] https://www.amazon.com/Central-Banking-101-Joseph-Wang/dp/0999136747/ https://www.amazon.com/Central-Banking-101-Joseph-Wang/dp/09...
- deleted 4y ago[deleted]
- imtringued 4y agoHow is the cantillon effect supposed to cause an exponentially and constantly increasing inequality? If I take you at your word inequality would be constant and never increase. Also, proponents of the cantillon effect forget that people with money can do an inverse cantillon effect by withholding their money from the markets and then they can do a regular cantillon effect by putting their money on the market. If we assume a positive return on capital aka a positive interest rate then inequality would rise simply because the wealthy have most of their consumption needs fulfilled already and then in the late stages of capitalism they would be the ones manipulating the cantillon effect because they act as a quasi central bank.
- cs702 4y agoThis isn't even wrong. Newly created money isn't given to recipients. It's either borrowed by financial institutions, who must repay it with interest, or used to purchase government and agency bonds from private holders in the open market. When a financial institution borrows from a central bank, the financial institution records an increase in financial obligations (a credit to Liabilities), along with a corresponding increase in cash & equivalents (a credit to Assets). All of this is in the bank's balance sheet, easily verifiable (e.g., by reading annual reports). What you're suggesting (somehow getting central banks to lend newly created money to individuals even if they don't ask for it) makes no sense.
- baybal2 4y ago[dead]
- ItsMonkk 4y agoIndeed. And it's clear through this lens that if the Fed's goal was actually to have a stable currency, they would grow the money supply through this method. Under a helicopter money scenario, the intended inflation/counter-deflation would happen nearly instantly, they could get the exact amount required, and we would move on with our lives. Right now we have lagging indicators for lagging indicators that are lagged through the Cantillion effect. Of course it's an absolute impossibility to get it correct! No wonder we get booms and busts! Deflation is bad, it causes rent-seeking through hoarding money. But inflation is bad, it causes rent-seeking through hoarding assets. The goal needs to be against rent-seeking, against zero sum behavior. The only way to accomplish that is steady prices.
- raincom 4y agoThere are two competing hypotheses: (a) deposits/savings create loans; (b) loans create deposits. (a) is false. Private banks create more money than central banks through loans, so your solution won't work for that side.